Yahoo Finance Does Hock Lian Seng Holdings Limited’s (SGX:J2T) PE Ratio Warrant A Buy?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Hock Lian Seng Holdings Limited (SGX:J2T)’s fundamentals and stock market performance.
Hock Lian Seng Holdings Limited (SGX:J2T) is trading with a trailing P/E of 10.3x, which is lower than the industry average of 12.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Hock Lian Seng Holdings
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for J2T
Price-Earnings Ratio = Price per share ÷ Earnings per share
J2T Price-Earnings Ratio = SGD0.40 ÷ SGD0.0383 = 10.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as J2T, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 10.3x, J2T’s P/E is lower than its industry peers (12.4x). This implies that investors are undervaluing each dollar of J2T’s earnings. Therefore, according to this analysis, J2T is an under-priced stock.
A few caveats
Before you jump to the conclusion that J2T is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to J2T. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with J2T, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing J2T to are fairly valued by the market. If this does not hold, there is a possibility that J2T’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to J2T. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for J2T’s future growth? Take a look at our free research report of analyst consensus for J2T’s outlook.
Past Track Record: Has J2T been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of J2T’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
